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Homebuyer Tax Credit Follies

When the 2008 economic stimulus bill created an $8,000 homebuyer tax credit to prop up the ailing housing market, the outcome was predictable: fraud and economic distortions.

In October, the IRS disclosed that it was investigating 100,000 “suspicious” tax returns for possibly fraudulent claims of homebuyer tax credits. On Wednesday, the Treasury Department’s inspector general reported that more than 1,200 prison inmates defrauded the government of $9.1 million in tax credits. The inspector general found another $28 million worth of fraudulent claims, which included dozens by IRS employees.

An IRS spokesman said the agency had “successfully blocked or denied nearly 400,000 questionable homebuyer claims and opened more than 150 criminal investigations. These aggressive efforts have saved taxpayers more than $1 billion.”

That’s nice, but how much is it costing taxpayers for the IRS to monitor tax returns and open criminal investigations?

As a Cato essay on fraud and abuse in government programs illustrates, losses to federal taxpayers from fraud, abuse, and other types of improper payments are in the ballpark of $100 billion a year or more. For example, almost one-third of Earned Income Tax Credit payments—$12 billion annually—are improper or fraudulent.

The homebuyer tax credit was supposed to help the housing market regain its footing. But immediately following the end of the tax credit on May 1st, home sales have plummeted.

The new housing market has never been this bad, at least not since the government started tracking such things in 1963. Outdoing even the pessimists’ expectations, sales of new homes declined by a record amount in May to a new low. The dismal data, released by the Census Bureau on Wednesday, followed a disappointing report on sales of existing homes earlier in the week and added to growing concerns about the strength of the economic recovery.

The Times quotes a housing consultant as saying home builders “should bite the bullet and stop building houses…They keep dumping new inventory into the market when what the market really needs is a moratorium.”

Perhaps builders are responding to the distorted market signals the government has created? Then again, it’s hard to sympathize with the housing industry, which agitated for the homebuyer tax credit to begin with. The housing bubble inflated and burst in part because of federal policies that the powerful housing lobby helped put in place.

As a Cato essay on housing finance and the 2008 financial crisis states, “We need to identify and undo policies that distort housing and financial markets, and dismantle failed agencies and departments, such as HUD, whose missions require them to distort markets.